A review of Chile innovation policies

With the growing success of Start-Up Chile, the Chilean government’s program to attract world class entrepreneurs, everyone has an eye on what’s happening in this odd-shaped country at the end of the world. But Chile innovation policies go way beyond Start-Up Chile, which happens to be mainly a very successful communication of the government. Chile, the so called « Jaguar of South America », is diversifying an economy mainly boosted by natural resources, and a service industry dominated by banks and telcos. And it wants everyone to know it.

Start-Up Chile is only the visible part of the iceberg

Let’s be clear, the success of Start-Up Chile is due to the amazing media coverage it has received, and it is first of all a fruitful communication of the Chilean government. The package it offers to potentially any entrepreneur in the world: a USD 40K equity-free grant and a one year visa to work in Chile; made a great hook to attract both attention and global talent. And it has never been a waste of money, even if most companies leave after achieving the program. In any case, Chile is at the origin of one of the largest startup network of the generation Y, and it is the link between every creation that stems from it. Chile won’t be this isolated tiny country at world’s end anymore, but on the contrary one the best connected.

If you go to one of the presentation briefs Start-Up Chile holds in most big cities around the planet, you will hear it is just the visible part of the iceberg. The Chilean Economic Development Agency (CORFO) implemented about 50 programs to support entrepreneurship and innovation. CORFO’s programs offer equity-free subsidies, or loans, and sometimes mere mentoring. In any case the objective remains the same: showing Chileans they can count on the support of their government to undertake an innovative project, and show the rest of the world Chile now offers much more than mining resources or a developed banking and insurance industry.

Chuquicamata, the biggest open pit copper mine in the world.

Chile controls 1/3 of the world copper production.

Each program targets a specific population (entrepreneurs in rural areas), topic (biotechnologies) or level of development of a startup (project on paper only, or already signification tractions). One the best known funding program is the so-called “Capital Semilla” (for Seed Capital), that startups can benefit from if they are selected in an Incubator. The subsidy is substantial: about USD 100,000 against a convertible 7% participation of the Incubator in the startup. A double-impact for the CORFO, which not only helps startups, but also favors the rise of an incubating ecosystem by substituting for the capital provider and yet allowing Incubators to take participations in the startups. CORFO holds a list of every incubator they help and that can make startups benefit from the Capital Semilla funding.

Lately, a complementary fund to Start-Up Chile, called Scale, was implemented. It offers a USD 100,000 equity-free grant (contrary to Capital Semilla), and can be seen as an incentive to stay in Santiago, as only startups with a legal presence in Chile are eligible, and they will be asked to stay yet another year in addition to the 6-months initial period. As such, it is the best of all public subsidies as the total grant (Scale + Start-Up Chile) goes up to USD 140,000 in equity-free for any company that would like to expand in Chile and Latin America. With efficient mentoring, access to a well-located coworking space, and one year and a half to spend in a city with 2,600 hours of sunlight a year (Paris: 1,700; California: 2,800).

Last but not least, Chile counts with various incentive-laws on entrepreneurship and innovation. It’s easier to create a company than anywhere else in Latin America. A platform called Tu empresa en un día (Your company in a day) was released in 2013 by Chile Atiende, the office of the Chilean Government in charge of digitalizing administrative processes. Bankruptcy procedures used to be harsh and could be a strong un-incentive for risk-takers. A law voted in early 2014 has updated the system and makes it way easier to go through the struggles of failure. Chile also counts with an incentive tax law to invest in R&D, which gives back to companies up to 35% of the resources invested in R&D, under the form of a tax credit.

Innovation policies are a good start, it will take time before they provoke a change

As we just said, Start-Up Chile is just a part of a bigger strategy aiming at showing Chile under a new light. Natural resources are slowly vanishing, industries are changing, and the country needs to diversify its economy. It’s a long-run bet. Even if Chile’s diversification movement have proven quite successful so far, it still lacks some features of a pro-innovation place.

It will take time before the laws impacts the business culture and provoke a change towards “embracing failure” and “pro-innovation” behaviors. Actually, the R&D tax law is still largely unused with only 0.3% of private expenses in R&D (against 2.5% on average in Western Countries). Beside, CORFO programs strongly focus on the first steps in the life of a startup. This has effectively democratized bootstrapping, by making everyone understand that they too, can create a company. But it takes more than favoriting bootstrapping to create a flourishing innovation ecosystem. Companies must find both tractions and capital to expand.

There is a lot of support to startups in their early life, which potential clients can be curious about. But are rarely truly interested. It is still significantly hard for startups in Chile to go beyond their first few tractions. The service market in Chile is quite small (about 45% of the PIB in a 17 millions inhabitants country) and already shared between big players such as banks and telcos. Even today, the strategy of these companies is to increase the volume of sales in existing activities, and they don’t seriously look at business opportunities with non-mature companies.

One could hope that capital injection would eventually allow one company to break in. But it is really hard to find investors beyond seed-capital, notably Venture Capitalists. Entrepreneurs may have to turn to the U.S.A. to find this type of financing. This is one reason for the implementation of Scale. At least it is a sign that Chile is aware of the problem.

InverSur Capital is one of the few VC in Santiago.

Another sign of this strongly risk-averse culture is the fact that copycats are way more likely to receive investment than truly innovative companies. Companies that implement and adapt a model that has proven successful in another country, especially in the U.S.A or in Europe, are generally seen as the only viable assets for Investment Funds.

From a risk-averse to a pro-innovation business culture

In a nutshell, the dominant business culture is still firmly risk-averse and trust will probably be the main issue of someone who wants to do business in Chile. One reason could be that Chile still lacks some success stories that would show that great payoffs dwell in the startup world. So far, the highest amount reached in the purchase of a startup (by far), is Portal Inmobiliario (a Real Estate Search Engine) acquisition by Argentinian giant MercadoLibre for USD 40 millions in 2014. This is a unique case.

Portal Inmobiliario is the biggest acquisition in Chile’s startup history.

As a conclusion, Chile is doing great. It has very successfully undertaken a diversification strategy and it’s starting to pay off. Yet it takes time before risk-averse players dare to look for new sources of revenue in innovating and non-mature businesses, and they may be barely starting to receive the message from the government. There is still a lot to do before it actually becomes an innovation hub that could somewhat pretend to compete with the Silicon Valley.